By Daryll E. Ray, Director of the University of Tennessee's
Agricultural Policy Analysis Center

September 1, 2005:
As we begin the process of thinking about the shape
of the 2007 Farm Bill, we need a new vision for agricultural
commodity policy. This new policy vision needs to be based on
a clear set of principles. Here is our list:

First, farmers should receive the bulk of their income from
the marketplace and not the government. Government payments
should not be used to subsidize integrated livestock operations,
agricultural commodity processors and exporters with a below
the cost of production supply of grains and oilseeds.

Second, agricultural policy needs to be based on a clear
understanding of the unique characteristics of the marketplace
rather than ideology. In response to low prices, consumers
do not switch to eating 4 or 5 meals a day. Similarly, in
the short-run, farmers do not reduce aggregate crop production
in response to lower prices.

What this of course means is that producers produce and consumers
consume about the same amount of total agricultural output
with little regard to changes in price. That in fact is the
crux of aggregate crop agriculture’s price and income
problems: self-correction does not occur adequately when inventories
swell and prices go into a free fall, because neither producers
nor consumers react much.

Third, the policy should not contribute toward the dumping
of agricultural products on international markets. And, fourth,
given the current budget pressures, the policy should cost
less than the $20 billion that the U.S. currently spends on
farm programs.

One concept that could meet such criteria is the merging
of agricultural and energy policy. If some cropland were switched
from corn and soybeans to the production of dedicated bioenergy
crops like switchgrass, the carryover stocks of major crops
could be reduced so that farmers would receive higher prices
for their food crops. Instead of relying on idled acres to
manage the production of major crops, the USDA could subsidize
the purchase of perennial biomass crops like switchgrass by
utilities for co-firing with coal to generate electricity.

Support would continue for the production of ethanol from
corn and biodiesel from soybeans and other oilseeds. The growing
importance of these two biofuels, particularly ethanol, has
been instrumental in increasing the domestic demand for these
crops at a rate faster than population growth.

Coupled with a program that diverts some cropland to the
production of dedicated bioenergy crops is the establishment
and maintenance of a buffer stock program of sufficient size
as to be able to supply domestic and export needs in the case
of a significant weather or disease related production shortfall.
It is important that the production of energy crops not result
in food shortages. It would be anticipated that policies would
be put in place to establish this buffer stock before acreage
would be diverted from food production to the production of
biomass.

In the short-run, as utilities gear up to be able to burn
biomass, annual setasides could be used to manage the production
of major crops. This would result in higher crop prices.

In the long-run, given advances in crop yields and the increase
in crop acreage, particularly in Brazil, there is the need
for the major crop exporting countries of the world to establish
cooperative policies to manage the production of crops.

Comparing the program with the criteria we outlined at the
beginning of this article, we find that, to the extent that
the nonrecourse loan rate is closer to the cost of production
than typical prices of late, cattle feeders and integrated
livestock producers, processors, and grain exporting firms
will have to pay closer to the cost of production to meet
their grain and oilseed needs, otherwise these commodities
will go into the buffer stock program. With these commodities
being sold at or above the nonrecourse loan rate, the issue
of dumping will become moot.

Using the production of dedicated bioenergy crops to manage
the production levels of feed and feed crops will provide
an alternative to idling land as a means of compensating for
the lack of price responsiveness on the part of producers,
thus taking into account the unique characteristics of crop
agriculture.

And, as a bonus, studies by our office have shown that such
a program has the potential to cost half or less than current
programs while still maintaining net farm income at acceptable
levels.

But the program specifics are really secondary at this point.
What is most important is the development of a consensus on
the principles that should underlie commodity programs. Commodity
producers should be at the center of that discussion. If they
are not, others will fill the void.

Daryll E. Ray holds the Blasingame Chair of Excellence in
Agricultural Policy, Institute of Agriculture, University of
Tennessee, and is the Director of UT's Agricultural Policy Analysis
Center (APAC). (865) 974-7407; Fax: (865) 974-7298; dray@utk.edu;
http://www.agpolicy.org.
Daryll Ray's column is written with the research and assistance
of Harwood D. Schaffer, Research Associate with APAC.